Business context and reporting period
This is CTI Industries Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014, filed August 14, 2014. The filing entity is CTI Industries Corporation, not YUNHONG GREEN CTI LTD. CTI makes and sells novelty balloons, packaging films, flexible containers, and vacuum-sealing products. Its operations include U.S., Mexican, European, and U.K. activities; the filing reports one business segment.
Financial performance
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Net sales | $13.16 million, up 1.0% year over year | $28.08 million, up 6.4% |
| Gross profit / margin | $3.03 million / 23.0% (prior year: $2.48 million / 19.0%) | $6.52 million / 23.2% (prior year: $5.46 million / 20.7%) |
| Operating income (loss) | $(56,000), versus $291,000 income | $270,000, versus $821,000 income |
| Net income (loss) attributable to CTI | $(122,000), or $(0.04) per share | $(77,000), or $(0.02) per share, versus $74,000 income |
Second-quarter gross margin improved, but higher operating expenses more than offset the improvement. For the first half, G&A rose to $3.87 million from $2.95 million; selling expense rose to $1.33 million from $0.90 million; and advertising and marketing rose to $1.05 million from $0.79 million. Management attributed much of the expense increases to consolidation of a variable interest entity (VIE), as well as higher audit, royalty, outside-service, and marketing costs.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $11,000, down from $1.65 million in the prior-year period. Receivables and inventory each increased by about $1.2 million; higher trade payables provided $2.66 million.
- Investing activities used $619,000, mainly for equipment and related capital spending. Financing activities provided $199,000, including $300,000 of stock proceeds and $263,000 of long-term debt repayments.
- Cash was $278,000 at June 30, down from $667,000 at December 31, 2013. Working capital was $11.42 million, versus $11.74 million at year-end; the reported current ratio was approximately 1.61.
- Balance-sheet line of credit was $8.80 million; management reported $1.3 million of additional availability. Total current liabilities were $18.78 million. Long-term debt, net of current portion, was $8.92 million; the filing also reports current debt and lease obligations.
- Total assets were $41.26 million and total equity was $12.92 million at June 30, 2014.
Material changes versus the prior comparable period
- Sales growth was led by foil balloons: first-half sales increased 8.5% to $13.39 million. Other sales rose to $1.96 million from $836,000, including $1.125 million from a VIE newly consolidated beginning in the fourth quarter of 2013.
- Vacuum-sealing product sales declined 34.0% in the quarter to $2.04 million; first-half sales fell 4.0% to $4.82 million. The quarter’s zippered-pouch sales declined to $376,000 from $824,000. First-half vacuum-sealing systems sales increased modestly, while pouch sales fell.
- First-half film-product sales decreased 11.6% to $1.93 million, which management attributed to lower sales to a principal customer. First-half latex balloon sales were approximately flat.
- First-half net loss replaced prior-year net income. Operating income declined despite improved gross margins, primarily alongside increased operating expenses.
- First-half interest expense declined, which management attributed to lower amortization of debt discount. The quarter also had a small foreign-currency transaction gain versus a substantial loss in the prior-year quarter.
Outlook, risks, contingencies, and unusual items
- No formal earnings or sales guidance is provided. Management expected to complete a restructuring of its BMO Harris and BMO Equity financing arrangements during the third quarter of 2014, potentially modifying covenants, providing additional financing, and reducing certain loan balances.
- The company received June 30, 2014 waivers for anticipated covenant noncompliance; management stated it was compliant with revised covenants or had obtained waivers. Liquidity depends significantly on bank financing and the revolving credit line.
- Customer concentration is significant: the largest customer accounted for 28.1% of second-quarter sales and 28.2% of first-half sales. The top two customers represented 36.3% of first-half sales, and together accounted for 36.1% of net receivables at June 30.
- Management cited seasonal foil-balloon demand, with historically about 40% of annual sales occurring December through March. Other risks include working-capital needs, debt covenant and refinancing exposure, customer concentration, and estimates for receivables, inventory, deferred taxes, and goodwill.
- On July 3, 2014, the company entered a 60-month lease for a flexographic printing press at monthly rent of $5,370.51. Management said ordinary-course legal claims were not expected to have a significant financial impact. The filing identifies no material changes in internal controls and states disclosure controls were effective.
- The company was evaluating the effect of the new revenue-recognition standard, effective January 1, 2017.
Important facts for investors to verify
- Confirm the filing issuer: the supplied filing is for CTI Industries Corporation, despite the request metadata naming YUNHONG GREEN CTI LTD.
- Review the status and final terms of the anticipated BMO Harris/BMO Equity restructuring, covenant waivers, and available revolving-credit capacity.
- Assess whether operating cash flow can recover as receivables and inventory grow, and whether the company can fund operations and capital needs with limited cash.
- Track the sustainability of gross-margin improvement against higher overhead and selling and marketing costs, plus the performance of vacuum-sealing products and the newly consolidated VIE.
- Monitor the dependence on major customers, including their sales contribution and share of receivables.